On 11 September 2023 the EU Commission published guidance note to help European operators identify, assess, and understand sanctions circumvention risks.
The Note provides a general overview of conducting due diligence by the EU operators as required by EU law.
EU operators have to perform appropriate due diligence calibrated according to the specificities of their business and the related risk exposure. For this each operator shall develop, implement, and routinely update an EU sanctions compliance programme that reflects their individual business models, geographic areas of operations and specificities and related risk-assessment regarding customers, business partners and staff.
To mitigate to the maximum extent their exposure to possible sanctions circumvention schemes, EU operators should conduct a strategic risk assessment, following the following steps:
- Identification of threats and vulnerabilities;
- Risk analysis;
- Design of mitigating measures;
- Implementation of mitigating measures; and
- Regular updating.
The Note also provide the overview on the implementation of the enhanced due diligence. The identified risk assessment and risk management approach should lead EU operators to adopt a proportionate approach and, in particular, by placing focus on those sectors that are deemed to be most critically exposed to circumvention risks, and accordingly put in place adequate commensurate systems to prevent those risks from occurring (‘enhanced due diligence’).
Good practices can be adopted when implementing enhanced due diligence (e.g. when the EU operator’s activity exposes him to a particular risk), at different levels:
- On/at the stakeholders level (identification and verification of business partners, customers, their representatives, their beneficial owners and other possible persons of interest);
- On/at the transaction level, flows of money and route of goods, transportation companies’ involvement and responsibility; and
- On the goods.
Best practices to address typologies of sanctions circumventions include those:
- Related to Trade: preventing possible diversion to/from Russia and/or Belarus via third countries; and
- Related to Banking and Finance: enhanced vigilance with regard to the use of correspondent accounts Transactions relying on correspondent accounts can lead to a higher residual risk of sanctions circumvention. Financial institutions may conduct an adequate assessment of risks and appropriate due diligence of the risks present in:
- the foreign respondent’s business and markets;
- the type, purpose and anticipated activity;
- the nature and duration of the relationship with the foreign respondent; and
- the supervisory regime of the jurisdiction in which the foreign respondent is licensed, and to design and implement controls to manage these risks effectively.
- the foreign respondent’s business and markets;
Lastly, the Note outlines certain indicative red flags related to business partners and customers:
- Indirect transactions (such as those using intermediaries, shell companies etc.) that make no or little economic sense;
- New customer / transactions with companies located in countries known as “circumvention hubs” and involving items listed as high-priority battlefield items;
- Transit through countries or territories known as “circumvention hubs” based on the information available. Specific measures that can be taken depending on the role and responsibility of the operator, e.g.:
- exporter who uses an external transport company: checks regarding the type of means of transport use, routings, use of sub-contractors, etc.
- transport company which is responsible for the transport of the cargo: checks regarding the actual goods to be transported; match with documentation, etc.
- Complex corporate or trust structures linked to countries friendly to Russia or whose complexity is not justified by the business profile of the customer. Use of trust arrangements or complex corporate structures involving offshore companies;
- Business partner has been recently established or has merged with a sanctioned entity or an entity linked to sanctioned entities or persons;
- Business partner shares address with multiple different companies (e.g. it is likely a shelf company);
- Changes of ownership of a corporate holding to reduce ownership stakes below the 50 percent threshold;
- Change of ultimate beneficial owner shortly before or after sanctions are imposed;
- Movement of assets previously associated with a sanctioned person, by family members or otherwise on their behalf;
- Numerous transfers of shares from sanctioned entities to non-sanctioned entities involving corporations incorporated by the same individuals or entity (often with a registered office at the same physical address);
- Potential control of an entity by a designated person, despite apparent direct ownership under the 50 percent threshold (member of Board of Directors, beneficial owner, managing director, other entities or persons on the ownership structure linked with a designated person);
- CEO/manager is never available for discussions, i.e., all communications go via a regular employee or a representative who seems to have a general Power of Attorney (PA).
When conducting general due diligence, if operators find evidence of any of the indicators above, they should launch a deeper screening.
Full text of the Note can be found on the below link:
FF International provides Compliance, AML and Risk Management services.
For further information, please contact:
Franco Falzon C.P.A. LL.M (Managing Director)
T: +356 2010 7771 (office)
M: +356 9989 5679 (mobile)
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